The market has been grinding steadily higher over the last week, leading many investors to believe they are missing out on the action. But is this move driven by actual fundamental strength, or something else? Is it the simple fear of missing out that is driving indexes higher? If the answer is the latter, then this move cannot be sustained for long. A recent research note from Morgan Stanley (NYSE:MS) explores this idea in further detail.
Trouble below the surface
Most of the major indexes are attempting to make new highs. The Dow Jones Industrial Average is near all-time highs, as are the S&P 500 and the Nasdaq. There are signs, however, that this latest bull run has become increasingly untethered from economic fundamentals, including the inability of the indexes to break those historical levels:
“Below the surface, there are some indications that perhaps earnings and economic growth in the U.S. are set to disappoint. Specifically, indices like the Dow Jones Industrial Average, the Dow Transports, KRE Regional Bank ETF and Russell 2000, which tracks small-cap stocks, all failed to make new highs in March. In the case of the KRE ETF, it is trading at almost 11% below its February 27 highs, and well below its 200-day moving average. We think such price action is consistent with the recent decline in Treasury yields and the inversion of yield curve, the first since 2007. We think it’s also supportive of our view that first quarter earnings season is likely to disappoint.”
A bad earnings season will not be the same as last time
The investment bank expects the first-quarter earnings season to disappoint investors. While some may think the market has already baked in this probability, they are likely to be wrong. A commonly held view is